Section 40 of the Income Tax Act, 1961 (in short ‘the Act’) disallows certain amounts mentioned therein, notwithstanding anything to the contrary in sections 30 to 38, in computing the income chargeable under the head “Profits and gains of business or profession“. Section 194C of the Act lays down provisions in respect of TDS on payment to contractors.
Recently, in ACIT, Kottayam vs. St. Mary’s Rubbers Private Ltd., Kottayam [I.T.A. Nos. 224/Coch/2016, date of decision 15/06/2017], the Revenue, aggrieved on the deletion of dis allowance by CIT(A) of Rs. 60,80,063 made by the Assessing Officer(AO) under section 40(a)(ia) of the Act for non deduction of tax at source on payments made by the assessee to C&F agents, filed appeal before ITAT, Cochin.
Facts in brief:
The assessee, a manufacturer and seller of centrifuged latex, had filed its return of income for the impugned assessment year, declaring income of Rs.70,89,989. An assessment under section 143(3) was completed on 21/12/2011, computing total income of the assessee at Rs. 77,87,140. Thereafter, the assessment was reopened for a reason that shipping freight of Rs. 9,70,828 was paid without deducting tax at source. During the course of assessment proceedings, it was noted by the AO that assessee had paid Rs. 60,80,063 as clearing and forwarding charges to one Mark Logistics. Claim of the assessee before the AO was that these were reimbursement of expenditure incurred by the said agent. As per the assessee, said C&F agent was incurring expenditure on its behalf and therefore, it was not liable to deduct tax at source. However, AO was not impressed. According to him, the assessee should have deducted tax at source on the payments effected to Mark Logistics. Since assessee had not deducted such tax, AO applied section 40(a)(ia) of the Act and made a dis allowance of Rs. 60,80,063.
Aggrieved by the order of AO, assessee moved an appeal before the CIT(A). Before the CIT(A), assessee produced a statement from Mark Logistics According to this statement, the amounts given by the assessee to Mark Logistics were reimbursement of expenditure. In the said statement, Mark Logistics certified that expenditure was incurred on behalf of the assessee and not C&F charges.
They also stated that they had deducted tax at source while effecting payments to various persons with whom they had entrusted the work of the assessee. Ld. CIT(A) sought a remand report from the AO. As per the CIT(A), in the remand report, the AO has admitted that amounts paid by assessee for Mark Logistics were re-imbursements. CIT(A) held that payment of Rs.60,80,063 made by the assessee to Mark Logistics were in the nature of reimbursement of expenditure and the payments received by them were not C&F charges. Relying on the judgment of the Hon’ble Gujarat High Court in the case of CIT vs. Narmada Valley Fertilizer Co. Ltd.  (361 ITR 192), the CIT(A) held that for re-imbursement of expenditure, deduction of tax was not required. He deleted the dis allowance made under section 40(a)(ia) of the Act.
Submission by Revenue:
Learned DR, assailing the order of the CIT(A), submitted before ITAT that assessee had paid Rs. 60,80,063 for the services received by the assessee from Mark Logistics, which were contractual in nature. According to him, these were not reimbursement of expenditure and even if it was reimbursement, as per the Ld. DR, there would have been profit booking by Mark Logistics in-built in the billings. In his opinion, AO has rightly considered the payments as liable for deduction of tax at source under section 194C of the Act. According to him, CIT(A), merely based on the submissions of the assessee, had allowed the claim of the assessee. Reliance was placed on the judgment of the Hon’ble Jurisdictional High Court in the case of CBDT vs. Cochin Goods Transport Association  (236 ITR 993 (Ker.)) and the judgment of the Hon’ble Apex Court in the case of Associated Cement Co. Ltd. vs. CIT and another  (201 ITR 435 SC).
Reply by AR:
In reply, Ld. AR submitted that the Delhi Bench of the Tribunal in the case of ITO vs. Deepak Bhargawa in I.T.A. No.343/Del/2012 dated 13.11.2014 had clearly held that section 194C would not be applicable for reimbursement of expenditure. As per the Ld. AR, facts of this case were very similar to that case. Reliance was also placed on the decision of the Bangalore Bench of the Tribunal in the case of DCIT vs. Dhanyaa Seeds (P) Ltd.  (42 taxmann.com 277) and that of the Hon’ble Gujarat High Court in the case of Pri. CIT vs. Consumer Marketing (India) (P.) Ltd.  (64 taxmann.com 16).
Decision by ITAT, Cochin:
The Tribunal considered the effect of CBDT Circular No.715 dated 08.08.1995 and observed that the said Circular was applicable only where consolidated bills were raised inclusive of contractual payments and re-imbursement of actual expenditure. Same view was taken by the Bangalore Bench of ITAT, Cochin in the case of DCIT vs. Dhanyaa Seeds (P) Ltd. (supra). Hon’ble Gujarat High Court in the case of Pr. CIT vs. Consumer Marketing (India) (P.) Ltd.(supra) held that when separate bills are there for reimbursement of expenditure received by C&F agent, TDS was not required to be made on reimbursement. The assessee in addition to reimbursement of expenses, separately paid brokerage and commission Rs.2,52,410 which was subjected to dis allowance in the original assessment. Hon’ble Members of the ITAT held that the CIT(A) was justified in deleting the dis allowance made under section 40(a)(ia) of the Act.